(Bloomberg) -- Brazilian fintechs are getting hit by a wave of defaults on loans they made to customers that the nation's bigger, legacy banks wouldn't touch, causing risky layers of an asset-backed credit market to collapse.
The companies, which include
It's reverberating through vehicles called FIDCs, which Brazilian firms use to raise cheaper financing. Delinquency rates in the 65.5 billion reais ($13.2 billion) fintech FIDC market reached 9.5% on average in January, up from the 3.5% six years earlier, according to Uqbar, a data provider that specializes in securitization in Brazil.
That's becoming a massive problem for the companies, because they hold the subordinated tranches of FIDCs as a way to have "skin in the game," said Leandro Albuquerque, an analyst from S&P Global Ratings who follows the industry.
"The risk of delinquencies remains high especially for unsecured personal and small business loans, due to slow economic growth prospects and still high interest rates," he said. "There are still challenges on the short-term horizon for these companies."
The startups earned a following — and the backing of investors — by promising to democratize lending in a country where obtaining credit is notoriously difficult.
Several of the more problematic FIDCs were raised just after the pandemic, when benchmark interest rates in Brazil were around 2% and the government was providing subsidized credit to companies and individuals, Albuquerque said. Brazilians who had never before held a bank account jumped at the fintech companies' offers, signing up for as many as six credit cards in some cases.
Three years later — with rates now in double digits — defaults are skyrocketing, marking another setback for Brazil's once-promising fintech industry. The nation has 1,627 fintechs, according to Distrito, and not all of them will survive.
Read more: Credit Card Rates Reach 790% in a Once-Hot Fintech Market
In many ways, it mirrors the shift underway for the global industry of financial startups that became a favorite of venture capitalists only to be caught out when credit conditions rapidly turned tighter.
But the situation in Brazil poses implications beyond the startup world and into the often overlooked, but vital 454 billion reais ($90 billion) Receivables Investment Fund (or FIDC for its name in Portuguese) market, which has been growing as a go-to place for small companies to raise financing.
In some ways, the structure is similar to asset-backed securities markets widely used elsewhere. But FIDCs are unique to Brazil. Most of the market is healthy — fintech FIDCs even grew 25% in the 12 months ended in January.
Open Co declined to comment. Nexoos and Gyra+ didn't return messages seeking comment.
Credit Woes
One of the largest of the companies, Open Co, was founded in 2021 as the result of a merger of Geru, which offered unsecured credit to "more established individuals," and Rebel, which provided loans to young Brazilians. Later that year,
By September of last year, defaults had consumed Open Co's 38 million reais subordinated tranche and parts of its intermediate tranche. The 170 million reais FIDC now has a 63% delinquency rate, according to Uqbar, although the senior layers, which were bought by
Last year, Open Co bought BizCapital, which provides digital credits to small businesses. The acquisition came after BizCapital FIDC, which had assets of 226 million reais in March 2022, posted rising default ratios, with reached 90% in January, according to Uqbar.
Open Co, which has provided 5 billion reais in credit since its founding, has about 214 employees. It has raised a total of 750 million reais in two equity rounds led by
Even as its default ratios soared, the startup, which uses machine learning and artificial intelligence to analyze credit, raised a new 50 million reais FIDC earlier this year.
Meanwhile, Gyra+, which was founded in 2017 and specializes in loans to smaller companies that have trouble tapping banks, has also issued a FIDC with high delinquency rates.
Nexoos, a peer-to-peer lending marketplace founded in 2016, issued a 336 million real FIDC that ended up liquidating in 2022 due to high defaults. In May 2021, the company was acquired by Ame, an arm of embattled retailer Lojas Americanas. As of 2022, Nexoos had doled out about 1 billion reais in loans.
Compounding problems, the companies don't have the same debt collection mechanisms as big banks, said Alfredo Marrucho, a research manager at Uqbar.
"There are loans that went unpaid for more than one year," he said, adding that some of the fintechs also have less historical credit data to accurately estimate — and prepare — for defaults. Many of their clients are also newcomers in taking credit.
"Customers prioritized paying back institutions with which they have long-lasting banking relationships," Marrucho said. "The less of a relationship you have with a company, the less likely you are to pay."
--With assistance from Rachel Gamarski.
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